“Sell in May” Continues to Seduce Market Timers

This is from Gary Alexander at Navellier Marketmail:

The S&P 500 tumbled 30 points (-1.4%) in the last two trading days of April, pushing its six-month performance (since October 31) below zero (-0.7%) for the first time since the 2008-09 bear market. Perhaps some of the “Sell in May and go away” crowd was trying to steal a march by selling stocks early.

As any market timer will tell you, November 1 to April 30 is the stronger half of the year, giving birth to the “sell in May and go away” strategy. According to Jeff Hirsch’s “Almanac Trader” (April 26, 2016, “Worst Six Months Begin in May,”) a hypothetical $10,000 invested in the DJIA in 1950 compounded to $838,486 during the six month periods from November 1 to April 30, while the DJIA actually declined a bit during the May to October months over the last 65 years, netting a $221 (-2.2%) cumulative loss.

That trend has continued recently with stronger gains in cold months vs. slower growth in warm months:

The S&P 500 declined over the last 12 months – down 0.29% in May-to-October and down 0.68% November-to-April. Beyond that, I see practical problems with acting on this “sell in May” theory: (1) For average investors, tax considerations (short-term capital gains) would deeply cut into your returns. (2) Lately, we’ve averaged small gains in the summer months. A gain is a gain, even if it is smaller. Why give up the 10% gain in the May-October season of 2013 or the 7% gain in 2014? (3) For most investors, a preferable strategy to selling all stocks is to be more selective. There’s always a bull market somewhere. And finally, (4) the “sell in May” theory ignores some historically good months in the heart of summer. According to Bespoke Investment Group (in their “2015 Market Calendar,”) July is the best-performing month in the last century (+1.51% average gains), while August is the #5 best month, at +0.91%.

This makes “sell in mid-August and go on vacation” more sensible than “sell in May and go away.”

Posted by on May 2nd, 2016 at 9:52 pm


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